True scale of Asian semiconductor manufacturing

In this article we explore the size of East Asian semiconductor manufacturing industry, navigate potential bottlenecks and describe each country’s semiconductor industry unique characteristics.

If we define East Asian region as composed of China, South Korea, Taiwan, and Japan, we could claim that East Asia is the centre of semiconductor manufacturing in the world.

It is very important from the perspective of semiconductor manufacturing industry to stop the spread of infection in Japan, as the country could become a bottleneck for the world’s semiconductors manufacturing if its lockdown lasts.

When we look at production data for semiconductors, it is typically aggregated either by producer’s country of origin (where their headquarters are based) or by the goods’ country of origin (outputs add up to the countries where factories are based).

Further, semiconductor manufacturers experience different levels of vertical integration. Integrated Device Manufacturers (IDMs) perform everything from design to manufacturing, fabless companies are focused mainly on R&D and designs, while foundries engage in pure manufacturing.

IDMs semiconductors output is counted in the country where the head office is located, even if their factories are dispersed around the world. Semiconductors designed by fabless players such as Broadcom, Qualcomm, NVIDIA in the United States and Huawei in China are manufactured by TSMC in Taiwan, and these semiconductors are calculated as the production of the country where the fabless companies headquarters are located. Therefore, the trade statistics often used by research companies often do not adequately recognize the contribution of foundries as TMSC and countries as Taiwan to global supply chain.

When we look into statistics, Japan surpassed the United States in the mid-1980s to have over 50% of the world market share in semiconductors production, but in 1995, it was reclaimed by the United States, and Japan’s share continues to decline. In 2017, it fell to just 7%.

On the other hand, East Asia’s share of semiconductor production excluding Japan began to increase after 2001, reaching 38% in 2017. The share of East Asia, including Japan, is around 45%, which is close to that of the US, that ranked first. Korean semiconductor and memory makers such as Samsung Electronics and SK Hynix vastly contribute to East Asia’s position on the global market.

To recognize the true scale of semiconductor industry in East Asia, we need to find the way to gauge the size of a manufacturing base.

One of the ways to achieve that is to look at the sales data by region of front-end and back-end semiconductor manufacturing equipment, as there should be a strong correlation between capital investment in the equipment and a scale semiconductor manufacturing.

Chart below shows the dynamics on the front-end semiconductor equipment market by region. From 2002 until 2008, when the financial crisis hit, Japan, the United States, South Korea, and Taiwan were in the leading positions regarding the spending. After the crisis, from 2009 to 2015, Japan dropped out from the game, while the demand for equipment in the US, South Korea, and Taiwan was still very strong. This is because Intel, which has the highest sales of semiconductors in the world, Samsung, which has the second highest sales, and TSMC, which has the third highest sales, spend massive amounts of money on CAPEX investments.

After 2016, Korea started spending dramatically. Also, Japan, where spending has been sluggish, started to grow, surpassing the United States. This was due to the explosive growth of the memory market in the age of big data.

The Chinese semiconductors manufacturing equipment spending started to increase around 2012, surpassing Japan and the United States in 2015 to reach the third place, and then overtaking Taiwan in 2018 and occupying the second place. According to our predictions this pace of Chinese spending is going to continue throughout 2020, reaching the level of South Korea, which ranks first. This is because China has begun to invest in mega factories for DRAM and NAND flash memory on stimulus of the “Manufacturing in China 2025” policy.

Keeping the momentum, Korea will likely continue to rank first, China second, Taiwan third and Japan fourth, with East Asia monopolizing the front-end equipment spending. The market share of East Asia in semiconductor equipment spending was about 45% until 2002, but it increased to 65-72% in 2004-2015, and continues to grow to about 80% in 2020.

The data looks largely similar for back-end semiconductor manufacturing equipment spending. Looking at the trends in the post-process equipment spending by country, from 2002 to 2009, Japan, the United States, Taiwan, and South Korea were in the leading positions.

Historically, between 2009 and 2013, Japan, the US, and South Korea spending on back-end equipment was in decline, while China was experiencing strong demand. Between 2013-2017, Taiwan and China were both spending heavily. In 2017, China was at the first place, Taiwan at the second, South Korea at third and Japan was at fourth place. As was the case for the front-end equipment, four East Asian countries were leading globally in spending.

The share of East Asian spending on back-end semiconductor manufacturing equipment was at 43% in 2001, but since then it has increased sharply and peaked at 68% in 2005. It dipped for a period but then started surging again from 2007, reaching 72% in 2017.

As we could clearly see from manufacturing equipment sales data, four East Asian countries dominate globally in terms of semiconductors production capacities, both in terms of pre and post processing.

We forecast around 80% of the world’s semiconductors production capacity will be localized in East Asia in 2022. The medium-term growth rate in China is still uncertain, due to US-China trade war and coronavirus pandemic.

With the advent of big data, the memory market has exploded in South Korea, with Samsung and SK Hynix, becoming memory production powerhouses. Taiwan’s TSMC has established a leading position in foundry operations, becoming the world’s “semiconductor factory”. In China Hong Hai Precision Industry Co., Ltd., buys more than one-third of the world’s semiconductors and uses them to produce various electronic devices for numerous brands. Although Japan’s share of semiconductor output has been declining, it continues to exert its strengths in semiconductor manufacturing equipment and semiconductor materials. 

Regarding the trends in DRAM sales in East Asia – Elpida Memory, the only DRAM maker in Japan, went bankrupt in February 2012 and was acquired by US based Micron Technology in July 2013. Since then, DRAM manufactured at the former Elpida Hiroshima Factory is counted as Micron’s.

The sales of DRAM makers, which basically consolidated into three main companies, expanded sharply from Q1 2016, when the boom for big data started, and peaked out in Q3 2018. Despite bottoming out in Q1 2019, it is beginning to recover.

East Asia’s (or actually South Koreas’) DRAM global sales share has been around 80% since 2015.

Regarding NAND sales – Kioxia’s (former Toshiba Memory) and Western Digital’s (WD) (US based company) NANDs are both manufactured at the Yokkaichi Plant.

From 2010 to 2012, the NAND sales of Kioxia and Samsung were almost equal. Since then, the gap in sales volume between the two companies started to increase.

Similarly, to DRAM, sales of all NAND makers started to increase from beginning of 2016, peaking out in Q4 2018. From Q2 2019 the sales started again to recover.

Despite the sales volumes ups and downs, similarly to DRAM, the global share of NAND sales in East Asia has been around 80%. With South Korea’s Samsung Electronics as clear market leader. In logic semiconductors, the fabless which only designs, and the foundry, which specializes in manufacturing, are being separated. On the foundry market, Taiwan’s TSMC has a monopoly with over 50% of the market share.

Chart below shows the sales trends of the global top 5 foundry companies. TSMC’s sales and growth rate has been truly exceptional.

In addition to TSMC, the world’s largest foundries include UMC (Taiwan), Samsung (Korea) and SMIC (China). These four companies account for about 70% of global foundry sales. This clearly positions East Asia as the world’s centre of foundry operations.

The percentage share of the Chinese demand in the global semiconductor market is increasing year by year, reaching 35% in 2019. Clear corporate leader is Hong Hai, which procures memory from South Korea and Japan and logic semiconductors from Taiwan to produce PCs, smartphones, various digital home appliances, and servers.

China is however only in about 15% self-sufficient regarding its semiconductor needs. Thus, on the wave of “China Manufacturing 2025” strategy initiated by Xi Jinping, China is trying to greatly improve its semiconductor self-sufficiency rate and is trying to build huge factories for DRAM and NAND on its territory. As a result, between 2019 and 2020, China bought the same number of front-end manufacturing equipment as Korea.

During the trade war the US, added to the Entity List, Chinese JHICC, which was trying to manufacture DRAM, what in effect is hindering the growth of China’s semiconductor industry. 

Japan’s semiconductor market share, which once accounted for about 50% of global shipments, fell to 7% in 2017. Products that remain truly globally competitive are only Kioxia NAND’s and CMOS image sensors by Sony.

However, Japan still plays an extremely important role in the global semiconductor industry. This is because it still leads in semiconductor manufacturing equipment and various semiconductor materials.

It was during the Japan-Korea trade war that broke out in July 2019 that the shortness of Japanese semiconductor-related products first created a bottleneck. The Japanese government has strengthened export control of fluorinated polyimide, EUV resist, and hydrogen fluoride to South Korea.

The effect of trade restrictions on hydrogen fluoride was the greatest, as there was no inventory of hydrogen fluoride held by Samsung Electronics or SK Hynix. It created fears that DRAM and NAND production will be affected. 

Companies as Tokyo Electron (TEL), Kokusai Electric and Hitachi High-Tech provide equipment which is irreplaceable from the point of view of semiconductor manufacturing industry.

Also, semiconductor production equipment made in Europe and the United States relies on Japanese parts. While in chemicals such as hydrogen fluoride and semiconductor materials such as wafers and resists, Japan Inc. still holds a sway.

South Korea relies on Japanese equipment and materials to manufacture memory, while Taiwan relies on Japan to manufacture logic semiconductors.

The less effective action to diminish the infection rates on the part of Japan, may have wider ranging implications for global semiconductor industry. China, Taiwan and South Korea, dealt with epidemy very effectively and are (almost) back to normal. Japan might be still before achieving the peak of infections. While closure of Japanese semiconductor supply chain, may lead to temporary stoppage of production in any of remaining three East Asian players.